Kevin Drum - November 2009

The housing bubble may be over in America, but all the money that fueled it still has to go somewhere. The Wall Street Journal reports today on the same resurgent bubble-iciousness that Nouriel Roubini was warning about yesterday:

Concerns are mounting that efforts by governments and central banks to stoke a recovery will create a nasty side effect: asset bubbles in real-estate, stock and currency markets, especially in Asia.

....Behind the trend are measures such as cutting interest rates and pumping money into the financial system, which have left parts of the world awash in cash and at risk of bubbles, or run-ups in asset prices beyond what economic fundamentals suggest are reasonable.

....The symptoms of a frenzy are most evident in Asia and the Pacific, where economies are recovering most quickly....Over the summer, a Singapore condominium developer raised prices 5% the day before units went on sale. After dozens of would-be buyers lined up on a steamy night, the developer — a joint venture of Hong Leong Group and Japan's Mitsui Fudosan — held a lottery for a chance to bid on the units. Singapore home prices rose 15.8% in the third quarter, the fastest rate in 28 years.

....The Australian dollar has jumped about 35% over the past 12 months as investors borrow in U.S. dollars to purchase Australian currency. The practice is propelling stock and bond markets faster than in the U.S. and Europe. Currency traders are betting that the Australian central bank, which raised interest rates by 0.25% on Tuesday, the second rise in two months, will continue tightening.

So I thought maybe I should turn on the TV and see if there were any election results available. I clicked over to CNN and Lou Dobbs was on. Literally the first words I heard were a question from Dobbs about whether the fact that there were 180,000 absentee ballots cast in New Jersey meant there was some kind of "skullduggery" going on. First panelist says, hey, who knows? Maybe. Second guy says let's not jump to conclusions. Finally the third guy reminds us that New Jersey has a new law this year making it easier to apply for an absentee ballot. Uh huh.

So within 60 seconds of turning on the TV my head hurt. I know, I know, I could have chosen some other channel. But still. Jesus.

From Paul Shoop, a retired attorney who lives in "an enclave of multimillion-dollar homes off curving Malibu Canyon Road," on the LA water board's proposal to ban septic tanks and install a modern sewer system in Malibu:

It's like living in a Third World country not to have sewers. But nobody wants to pay that sort of exorbitant fee. If we need a sewer system, you expect government to provide that service.

Of course, the proposed fee for the new sewer system really is pretty exorbitant. But a big part of the reason for that is because Malibu is so sparsely settled, which means the cost of the system gets divided up among a small number of homeowners. And why is Malibu so sparsely settled? Because the current wealthy homeowners like it that way. Apparently they just don't like paying the price.

The folks at Law Enforcement Against Prohibition emailed this morning to highlight an amendment that Chuck Grassley is offering to a bill that would create a National Criminal Justice Commission. Here's the amendment:

The Commission shall have no authority to make findings....that involve, support, or otherwise discuss the decriminalization of any offense under the Controlled Substances Act or the legalization of any controlled substance listed under the Controlled Substances Act.

See? If you want to make sure your experts don't come to conclusions you dislike, just prohibit them from talking about those conclusions. Then they don't really exist. That's the American way of science.

And it's becoming the British way of science too, at least when it comes to drug policy. The Brits used to at least pretend to listen to their experts, but, as Mark Kleiman explains:

That has changed under the New Labour government, which has also taken a number of other steps to “Americanize” British governmental practice, for example by building up the power of the Prime Minister’s office vis-a-vis the ministries, in which the ministers are famously captives of their civil-service officials. In some ways, this is a “democratizing” step, elevating the importance of the beliefs and values of elected politicians over those of unelected experts. But that doesn’t mean that those of us in the business of being, and training, experts have to like it, and insofar as expert beliefs track objective reality more closely than do voters’ prejudices, it also means making decisions with a weaker connection to the actual phenomena.

When the head of the Advisory Committee on the Misuse of Drugs gave a careful, analytic lecture arguing that cannabis and LSD were over-controlled compared to more harmful drugs such as alcohol, the Home Secretary promptly sacked him on the grounds that for a scientific advisor to express an opinion touching policy made it impossible to have confidence in the adviser’s objectivity. This is, not to put too fine a point on it, bullsh*t. What the Home Secretary clearly means is that the Government is committed to the War on Drugs and isn’t interested in any advice that might get in the way.

Democrats have blown so many deadlines for getting health reform done this year that insiders are increasingly skeptical they can finish by year’s end — and some even suggest the effort might slip to a new deadline, before the State of the Union address.

....In the Senate, Majority Leader Harry Reid is still wrangling with his moderate members to corral 60 votes just to get the debate started. And on Monday, Reid sent a letter to Republicans acknowledging that he is waiting on the Congressional Budget Office’s cost estimates and analysis to finish drafting a bill....Democratic Sen. Kent Conrad said he spoke with CBO Director Doug Elmendorf last week and that it sounded like “it would be quite a while” before the estimates were ready. The news makes a Christmas completion “a challenge,” Conrad said.

Regular reader RPH emails in response:

Was talking to some of the local Democratic Party organizers in Lancaster County, Virginia, aka my parents, and the feedback they hear is that Obama is quickly coming to be viewed as a ditherer, unable to timely make decisions or close the deal. That he doesn't seem strong enough to push key programs through, etc. This is the backdrop for why so many Ds in Va this year seem apathetic about voting. Lancaster is also fairly conservative so I think many Ds are just parroting what their R friends keep spouting, I'm sure, with increasing volume, with the reality being the economy which is devastating that area of Virginia. For what it's worth, everyone is extremely frustrated by the Ds poor showing in Va this year.

But still.

O needs to get some big things under his belt and soon. If he can get Afghanistan off his plate, that might buy him some time on Health Care without running the risk of a dangerous loss of momentum. But right now, every thing seems stuck in an endless loop. Part of this is the media cycle of course, but that's unfortunately the reality of governing now — where the steady perception of action, decisiveness and competence are key.

Is RPH right? Is this soon to become the new conventional wisdom? I certainly don't blame Obama for healthcare, where his leverage to kick the Senate into action is limited, but even I'm getting a little antsy about Afghanistan. Yeah, I want him to get it right, but there's a limit to how long this stuff can stay simmering on the cooktop.

Anyway, I'm only passing this along, not really endorsing any of it. Just some raw data to chew over.

So who's going to win today? Leave your guesses in comments. The warm glow of being right is your reward if, in fact, you turn out to be right.

I haven't blogged much about any of this because none of it has seemed very interesting up until the last minute soap opera in the NY-23 race. Even by the standards of off-year elections this is a pretty small one, and though the British press routinely projects the future course of the empire from the results of a single by-election in West Bromwich, we have a hard time pulling off quite the same level of breathless credulity here. There's just too much obviously local spin to all these races. Still, I admit that I'll be impressed if Jon Corzine manages to pull out a come-from-behind victory by insinuating that his opponent is fat.

Backed by some of the most powerful members of the Senate, a little-noticed provision in the healthcare overhaul bill would require insurers to consider covering Christian Science prayer treatments as medical expenses.

The provision was inserted by Sen. Orrin G. Hatch (R- Utah) with the support of Democratic Sens. John F. Kerry and the late Edward M. Kennedy — both of Massachusetts, home to the headquarters of the Church of Christ, Scientist....The spiritual healing provision was introduced in the House by Rep. John Shimkus (R-Ill.), whose district includes a Christian Science school, Principia College.

I have a conflict of interest here since I come from a Christian Science background, but holy cow does this seem like a bad idea. Just a really, stupendously bad idea. It's true that not everything that seems like a slippery slope really is one, but this really is one. If it passes, can you imagine how this would play out among the Colorado Springs set within a few years? The mind reels.

A year ago, the implosion of the global economy prompted a huge flight to quality. Nobody wanted risky assets anymore. All they wanted was nice, safe, United States Treasury bonds.

The economy has stabilized since then, and that means that investors with access to lots of cheap money are once again becoming eager to invest in risky assets. Pimco's Paul McCulley suggests that this makes perfect sense as long as everyone is convinced that the Fed will hold interest rates at zero for a long time, but then he admits that it's all a bit of a paradox. After all, the Fed will only hold down interest rates if the economy continues to suck, in which case rising asset prices are just a big bubble. But if the economy recovers, thus justifying the high current prices of risky assets, then the Fed will raise interest rates and the whole thing will come crashing down. It's a quandary. In the end, though, he advises a bit half-heartedly that "the time has come to begin paring exposure to risk assets, and if their prices continue to rise, paring at an accelerated pace."

The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates — as low as negative 10 or 20 per cent annualised — as the fall in the US dollar leads to massive capital gains on short dollar positions.

....Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed’s policy of buying everything in sight....So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe — for now — for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

....But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever....A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets — equities, commodities, emerging market asset classes and credit instruments.

....This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.

Now that's a cheery thought, isn't it? Monstrous amounts of leverage are going to be employed bidding up assets of all kinds, and monstrous amounts of money are going to be made. As usual, everyone will assume they'll be able to get out in time, and about 99% of those people will be wrong. Then: kaboom. The yen carry trade took down Iceland and a few hedge funds, but the dollar carry trade is going to take us down.

Well, maybe, maybe not. Roubini does seem to have some pretty sizable financial mood swings. But I have to admit that the stock market sure looks overvalued to me too. Corporate profits may be up for the moment, but belt tightening will only work for just so long. Eventually revenues need to rise, and it's a little hard to see where that's going to come from in the short term.

But I'm a pessimist. Even in good times I'm a pessimist. So who cares what I think?

The Wall Street Journal editorial board is pretty happy that conservative activists have taught the "GOP's backroom boys" a lesson by forcing moderate Republican Dede Scozzafava out of the NY-23 congressional race in favor of right-wing darling Doug Hoffman. No surprise there. However, they also offer a warning:

But that lesson will be for naught if conservatives conclude that their victory is reason to challenge any candidate who doesn’t agree with them on every issue....Democrats did themselves no favors by driving Joe Lieberman out of their party, and conservatives will do their cause no good by forcing GOP candidates in Illinois, California and Connecticut to sound like Tom DeLay. If conservatives now revolt against every GOP candidate who disagrees with them on trade, immigration or abortion, Nancy Pelosi and Harry Reid will keep their majorities for a very long time.

I sort of hate to admit this, but they're right about Lieberman. It would have been great to get rid of him — and it was worth a try in a liberal state like Connecticut — but in the end all it did was make him even more embittered and more estranged from the party than before. As a result, he's now loudly making the rounds of cable news shows promising to vote against cloture on any healthcare bill that includes a public option. As near as I can tell, this isn't motivated by any ideological objection to the public option at all. It's motivated mostly by fact that he's still pissed off about how he was treated in 2006. If he'd been left alone and had won reelection as a Democrat, he'd probably be going along with the Democratic leadership on this with no real complaints.

You can't win 'em all, I guess. And it was worth a try. But there's also a price to pay when you don't judge the chances of success with quite enough of a gimlet eye.